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Abstract
Studies have provided insights on control systems, but results have not
developed into a widely accepted theory of management control in explaining the
antecedents of budgetary slack. This study attempts to answer the peculiarities and
anomalies shown by prior researches by examining direct effect of diversification,
business unit strategy on budgetary slack, or passing through the intervening
variables, budget emphasis and incentive systems. Managers power distance was
postulated to affect the extent of the relationship between the rigidity of budget
emphasis and budgetary slack.
A hundred and one responses from the independent-subsidiaries companies
were gathered and then analyzed by Structural Equation Modeling set up in Lisrel 8.5
and moderated regression analysis with dummy variable. The study found that while
both diversification and business unit strategy significantly affect budgetary slack and
indirectly through budget emphasis, incentive system insignificantly affects the
presence of budgetary slack. Surprisingly, the results suggest that the relationship
between budget emphasis and budgetary slack is negative and stronger for managers
with low power distance than for managers with high power distance, as opposed to
the positive interactions hypothesized that high power distance managers react
favorably to the high emphasis on meeting the budget rather than managers with low
power distance.
Key words: budgetary slack, power distance, business unit strategy, diversification
I. Introduction
The budgetary control systems have been examined widely by many researchers
for almost five decades. One of important areas has been focused on supervisory
style, which has been used to evaluate subordinates performance relying on
budgetary information. It was first pioneered by Hopwoods (1972) seminal paper,
where recent budgeting literature has shown great interest in understanding possible
effects of budgetary control styles.
Later, Most of prior empirical evidences generally maintained that the incidence
of dysfunctional behavior is affected by the tightness of budgetary controls; which is
the condition when employees, mostly at the management organization levels, are
evaluated primarily on whether or not they achieved their budget. It implies,
therefore, all aspects of job prospects and facilities strongly depend on the managers
ability to attain the budget target. Managers who miss the targets may face the
prospect of interventions by upper management, the loss of organizational resources,
the loss of annual bonuses/incentives, and worst, perhaps, the loss of their job
(Merchant & Manzoni, 1989). Under these circumstances, managers may look for
ways to protect themselves from the downside risk of missing budget targets and the
stigma normally (Stede 2000).
95
Frucot and Shearon (1991) for instance, they examined the effect of managers power distance and
uncertainty avoidance on the budgetary participation, performance, job satisfaction and locus of control
to 83 Mexican managers.
97
98
99
100
Budget
Emphasis
H2
H5
PD
H7
H9
H1
Diversification
Slack
H4
Strategy
H3
H8
III. Method
3.1.
The sample
H6
Incentive
Pilot study was conducted to the 34 respondents
that represent the sample by
conducted interview to ensure feasibility, understandability and clarity of the
101
102
Variable
STRATEGY
DIVRSFTCN
INCENTIVE
EMPHASIS
BDGSLACK
Pow Dist
N
101
101
101
101
101
101
Mean() Std.Dev ()
5
2
0
7
7
14
18.861
5.663
0.101
27.316
20.158
27.435
25
19
0.3
35
25
37
5
0
0
7
5
8
25
35
25
40
3.867
4.641
0.074
5.434
4.706
5.034
: Unidentified
IV. Results and Discussion
H1 to H8 were analyzed by Structural Equation Modeling in LISREL 8.05
Simplis. Despite the model were threaten as the observed variables, rather than the
latent variables (unobserved variables), this is the common method in a behavioralbased accounting research (Stede 2001; De ruyter and Wetzels 1999). In fact, this
test produced a better confirmation about factor dimensions and the causality
relationship between those factors. Nevertheless, H 9 was analyzed by moderated
regression analysis. Therefore, we assumed that there is no other antecedent (i.e.
103
H1
Diversification Slack
0.337
0.000
H2
Diversification Emphasis
0.212
0.064
H3
Diversification Incentive
0.002
0.198
H4
Strategy
Slack
0.574
0.000
H5
Strategy
emphasis
-0.390
0.004
H6
Strategy
incentive
-0.002
0.253
H7
Emphasis
Slack
-0.192
0.002
104
b.
did not attempt to delete ones, because outliers must be viewed within the context of the
analysis and should be evaluated by the types of information they provide. In addition,
Hair et al. (1995) mentioned that outliers should be retained to ensure generalizability to
the entire population (p. 66)
Model fit is very good: (2 = 0.193; root mean square error of approximation = 0.000;
adjusted goodness of fit index (AGFI) is 0.988, above the recommended acceptance level
(0.90); normed fit index (NFI) is 0.998; comparative fit index (CFI) is 1.000 proving the
perfect fit (Arbuckle and Wothke 1999), which is above a common recommended value
0.90 (Hair et al. 1995)
105
(1)
= budgetary slack
= budget emphasis
= managers power distance (0 for low power distance and 1 for high power
distance)
(2)
(3)
Sig. p.
0.520
0.023
0.011
106
8.042
0.000
Budgetary
Slack
High PD
Low PD
Budget emphasis
Surprisingly, although the moderating effect of power distance is significant,
the negative sign is not expected. It means, therefore, business unit managers with
high power distance tend to react favorably to a low budget emphasis evaluative style
in achieving the budget target rather than managers with lower power distance. Since
the satisfaction of managers with directive or persuasive superior is large for
managers with high power distance (Hofsede 1980) greater reliance will be placed on
non-accounting performance measures in the low budget emphasis
5. Limitations and Avenues for Further Research
This study carries several inherent limitations. Since the very low response
rate, totally 11.25%, the question arises as to whether the responses obtained are
representative of the population. The use of questionnaire also introduces the
possibility that the respondents may place a different interpretation on the questions
than did the researchers. Efforts were made to overcome this limitation, which was by
107
Baber, W., S. Janakiraman, and S. Kang. 1996. Investment Opportunities and the
Structure of Executive Compensation. Journal of Accounting and Economics
21: 297-318.
Baiman, S., D. Larcker, and M. Rajan,. 1995. Organizational Design for Business
Units. Journal of Accounting Research 33: 205-229.
Bourgeois, L, 1981. On the Measurement of Organizational Slack, Academy of
Management Review 6: 29-39.
Brownell, P. 1982. The Role of Accounting Data in Performance Evaluation,
Budgetary Participation and Organizational Effectiveness. Journal of
Accounting Research. Spring: 12-27
_________. 1985. Budgetary Systems and the Control of Functionally Differentiated
Organizational Activities. Journal of Accounting Research. Autumn: 502-512
108
110
Not at all
To a slight
extent
To a moderate
extent
To a great
extent
To a very
great extent
(1)
(2)
(3)
(4)
111
(6)
(7)
(8)
Lowest
lower
Not bad
higher
highest
(1)
(2)
Product quality
(3)
Brand image
(4)
R&D expenditures
(5)
Product features
Budget emphasis
A high emphasis on meeting the budget is the condition when subordinate managers
are evaluated primarily on whether or not they achieve their budget. This instruments
measure the rigidity of budget emphasis
1
Definitely
false
False
Neutral
True
Definitely
true
(1)
(2)
(3)
(4)
(5)
(6)
112
Budgetary slack
This instruments measure whether you as the business unit managers intentionally set
your budget target lower than your honest forecast about the future so that the budget
becomes easier to achieve.
1
Definitely
false
False
Neutral
True
Definitely true
(1)
(2)
(3)
(4)
(5)
113